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ESAs consult on margins required for non-centrally cleared derivatives

European Supervisory Authorities (ESAs) have launched a second consultation on draft standards outlining the framework of the European Market Infrastructure Regulation (EMIR). 11 Jun 2015

As most decisions have already been agreed on the review of the EMIR framework following a first consultation held in April 2014, this second consultation focuses on over-the-counter non-centrally cleared derivatives, the European Banking Authority (EBA) said in a statement

Draft regulatory technical standards (RTSs) have been developed to prescribe the amount of initial and variable margin that counterparties must exchange, as well as the methodologies that should be used to calculate them, the EBA said.

The draft RTSs also cover the criteria for deciding whether collateral is eligible, sufficiently diversified, and not subject to 'wrong-way' risk, the EBA said.

ESAs have reviewed or clarified some aspects of proposed rules from the first consultation, including the exchange of margins with third-country entities and the treatment of non-financial counterparties, the treatment of covered bonds swaps, the timing of margin exchanges, concentration limits for sovereign debt securities, requirements on trading documentation, minimum credit quality of collateral, initial margin models, 'haircuts' for foreign exchange mismatch, the treatment of cash collateral for initial margin, and reviewed criteria on intragroup exemptions, the EBA said.

The draft RTSs also include revisions to the phase-in of initial margin requirements and a new phase-in for variable margin. These are based on amendments issued by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) in March, the EBA said.

The consultation will run until 10 July. A public hearing will be held at the EBA's office in London on 18 June.

EMIR came into force in August 2012, across all EU member states. It aims to increase the safety and transparency of OTC derivatives markets.

EMIR requires that all OTC derivatives contracts are cleared and derivatives transactions are reported to trade repositories. EMIR is designed to establish a framework to enhance the safety of central counterparties. 

Earlier this month Jonathan Hill, European Commissioner for financial stability, financial services and capital markets union, spoke about the European Commission's own review of EMIR.

The Commission is "not planning a change to the fundamental objectives of the Regulation" but it is possible that reforms could stem from the review, Hill said.

"It does make sense to step back and ask ourselves whether we managed to get everything exactly right all of the time, to see whether there have been unintended consequences," Hill said. "If the evidence does show that the rules are not proportionate to the risks posed by different types of institution, or if there are ways to improve the regulation so it better meets the objective of financial stability, then we should have the confidence to adapt the existing framework," Hill said.